angelo prof dgn div 2004
TRANSCRIPT
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Journal of Financial Economics 72 (2004) 425456
Are dividends disappearing? Dividend
concentration and the consolidation of earnings$
Harry DeAngeloa,*, Linda DeAngeloa, Douglas J. Skinnerb
a
Marshall School of Business, University of Southern California, Los Angeles, CA 90089, USAbUniversity of Michigan Business School, Ann Arbor, MI 48109, USA
Received 4 September 2002; accepted 12 March 2003
Abstract
Aggregate real dividends paid by industrial firms increased over the past two decades even
though, as Fama and French (J. Financial Econ. 60, 3) (2001a) document, the number of
dividend payers decreased by over 50%. The reason is that (i) the reduction in payers occurs
almost entirely among firms that paid very small dividends, and (ii) increased real dividendsfrom the top payers swamp the modest dividend reduction from the loss of many small payers.
These trends reflect high and increasing concentration in the supply of dividends which, in
turn, reflects high and increasing earnings concentration. For example, the 25 firms that paid
the largest dividends in 2000 account for a majority of the aggregate dividends and earnings of
industrial firms. Industrial firms exhibit a two-tier structure in which a small number of firms
with very high earnings collectively generates the majority of earnings and dominates the
dividend supply, while the vast majority of firms has at best a modest collective impact on
aggregate earnings and dividends.
r 2003 Elsevier B.V. All rights reserved.
JEL Classification: G35; G32; M41
Keywords: Dividends; Payout policy; Earnings concentration; Losses
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$We would like to acknowledge the helpful comments of Jim Brickley, Ken French, Tom Gilligan, John
Matsusaka, Dave Mayers, Kevin J. Murphy, Micah Officer, Oguz Ozbas, Ed Rice, Jay Ritter, Ren !e Stulz,
Randy Westerfield, Fred Weston, and especially the referee, Eugene Fama. We are grateful for the
research assistance of Darcy Baker, Ido Dotan, Atul Gupta, Terry Lichvar, April Xu, and especially Mei
Feng and Aaron Lerner, and for the research support of the University of Southern California (Charles E.
Cook/Community Bank and Kenneth King Stonier Chairs) and the University of Michigan BusinessSchool (KPMG Professorship).
*Corresponding author. Tel.: +1-213-740-6541; fax: +1-213-740-6650.
E-mail address: [email protected] (H. DeAngelo).
0304-405X/$ - see front matter r 2003 Elsevier B.V. All rights reserved.
doi:10.1016/S0304-405X(03)00186-7
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1. Introduction
In their intriguing study, Disappearing Dividends: Changing Firm Characteristics
or Lower Propensity to Pay?, Fama and French (2001a) document a large declineover 19781998 in the number and percent of nonfinancial and nonutility firms
(hereafter, industrials) that pay dividends. Their analysis indicates that this dramatic
change in dividend practices is due both to changes in the population of firms that
are now publicly held (with many more public firms now exhibiting the
characteristics of firms that historically have not paid dividends), and to a reduced
propensity to pay dividends by firms whose characteristics historically would have
led them to distribute cash to stockholders. Although Fama and French carefully
state that their findings show a reduction in the number and percent of dividend-
paying firms, their evidence is commonly interpreted as indicating that dividends
themselves are disappearing.1 The latter view seems more than plausible, given the
striking fact that the number of dividend-paying industrials has declined by more
than 1,000 firms (over 50%) over the last 2025 years.
Although our evidence confirms a radical transformation in corporate dividend
practices over the last two decades, it does not indicate that dividends are
disappearing. Rather, dividends paid by industrial firms actually increased over
19782000, both in nominal and in real terms (by 224.6% and 22.7% respectively for
our sample). Why did aggregate real dividends increase despite a 50%-plus decline in
the number of payers? The answer is twofold: (i) the large reduction in payers
occurred almost entirely among firms that paid very small dividends, with the loss ofthese firms dividends having at best a minor impact on the aggregate supply, and (ii)
dividends simultaneously increased substantially among the largest payers, reflecting
a marked increase in their real earnings. In short, the increase in real dividends paid
by firms at the top of the dividend distribution swamps the dividend reduction
associated with the loss of many small payers at the bottom.
These secular changes reflect high and increasing dividend concentration. For
example, the 25 largest dividend payers, all of which are old line established firms,
collectively supplied over half (54.9%) of aggregate industrial dividends in 2000.
Moreover, the earnings that underlie these high dividend payments are themselves
highly concentrated. The total earnings of the 25 top dividend payers constitute51.4% of aggregate industrial earnings in 2000 and, in real terms, are more than
double their 1978 level. The dividends paid by these 25 firms in 2000 exceed their
1978 level by $9.2 billion in real terms ($24.3 billion in year 2000 dollars), an increase
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1For example, The New York Times and The Economist report that dividends have become less
relevant and perhaps irrelevant, citing the findings of Fama and French (2001a) as well as low dividend
yields and the popularity of stock repurchases (Dividends Are Fading as Market Signals, Too, The New
York Times, November 7, 1999, Shares Without the Other Bit: In Corporate America, Paying Dividends
Has Gone Out of Fashion, The Economist, November 20, 1999, and Economics Focus: Dividends
End, The Economist, January 20, 2002). Time cites low dividend yields and an increased incidence of
dividend omissions by healthy electric utility firms as evidence that dividends have become only slightly
more relevant than the gushing palaver in an annual report (Disappearing Dividends? Ending Payouts
May Be a Good Thing for Investors, Time, February 2, 1998).
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that is greater than the $7.1 billion aggregate real increase for all industrial firms.
(Here and throughout the paper, we compare dividends and earnings for 1978 and
2000 by converting 2000 dollars into 1978 dollars using the consumer price index.)
This evidence shows that a relative handful of firms now both dominates the supplyof dividends and generates the preponderance of earnings, and that both dividend
and earnings concentration have increased substantially from the (already high) level
of two decades ago.
Changes in the cross-sectional distribution of earningsespecially among firms at
the top end of the distributionare the fundamental reason why real dollar
dividends paid by industrial firms have increased even though, as Fama and French
(2001a) conclude, industrial firms now exhibit a reduced propensity to pay dividends
(i.e., they are now more likely to pay zero dividends, controlling for earnings and
growth opportunities). We find that 100% of the firms with at least $1 billion in real
earnings paid dividends in 1978, whereas 85.7% paid dividends in 2000, consistent
with Fama and Frenchs reduced propensity to pay. However, although a smaller
proportion of firms with high real earnings now pays dividends, top earners continue
to exhibit a very strong tendency to do so. And since top-end firms now produce so
much more in real earnings, on net this group shows a large increase in real dividends
even though a few very large earners, primarily technology firms, have been slow to
initiate dividends. The end result is that aggregate dividends paid by industrial firms
increased over 19782000 despite the reduced propensity to pay dividends.
Overall, the supply of dividends by industrial firms exhibits a two-tier structure in
which a small number of firms with very high earnings collectively generates themajority of earnings and dominates the dividend supply, while the vast majority of
firms has at best a modest collective impact on aggregate earnings and dividends. We
discuss the implications of the two-tier structure for the dividend clientele and
signaling hypotheses and for the evolution of corporate payout practices in Section
7. Section 2 begins the paper by describing our sampling procedure, and it also
details the aggregate dividend increase from 1978 to 2000 for industrial firms. Section
3 documents the concentration of dividends and the consolidation therein that has
occurred over the last two decades, while Section 4 does the same for earnings.
Section 5 identifies the top payers, the top nonpayers, and the firms with the highest
earnings in 2000. Section 6 documents how many of the 1978 dividend payerscontinued to pay dividends in 2000, the strong influence of these continuing payers
on the 2000 dividend supply, and what happened to the remaining firms (primarily,
they were acquired).
2. Sampling procedure and aggregate dividends, 19782000
Shoven (1986, Table 2) reports that US government data show a near doubling of
nominal dividends for the corporate sector as a whole over 19781985. And this
trend continues, with aggregate nominal dividends increasing 647.2% over 19782000, nearly twice the contemporaneous 330.0% increase in GDP, and with
aggregate real dividends increasing 182.9% (all data from Economic Report of the
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President, 2001). These data paint a very different picture from the impression one
forms from Fama and Frenchs (2001a) finding that the number of dividend payers
has fallen by more than 50% since 1978 (see footnote 1 above). Of course, the
government population is not confined to publicly traded industrials, the sample thatFama and French study, since it also includes private firms and publicly held
financials and utilities. However, as we show below, aggregate dividends also
increased for publicly traded industrials, thereby posing the conundrum that we
study in this paper: why have aggregate dividends increased in the face of a radical
decline in the number of payers?
Following Fama and French (2001a), we sample CRSP industrial firms with SIC
codes outside the ranges 49004949 and 60006999 (financials and utilities). We call
nonfinancial and nonutility firms industrials, while recognizing that this group
also includes service firms, conglomerates, and perhaps other companies not
conventionally labeled industrials. Like Fama and French (2001a), we restrict
attention to NYSE, AMEX, and NASDAQ firms with CRSP share codes 10 or 11
for at least one month of each year in question, and with nonmissing December share
price and quantity data. We consider only CRSP firms with dividends and earnings
on Compustat (the CRSP/Compustat sample). Our sample sizes differ slightly from
those of Fama and French because we place different requirements on the
availability of specific data items, and probably also because of differences in how
we implement sampling criteria regarding the monthly observation of CRSP share
and/or SIC codes. Fama and French examine trends over 19781998, while we
employ data that became available after publication of their study and thereforeexamine trends over 19782000.
Table 1 shows that the large decline in the number of dividend payers from 1978 to
2000 is confined to industrial firms. While the number of dividend-paying industrials
fell 58.8%, from 2,250 in 1978 to 926 in 2000, the number of payers among financial/
utility firms increased by 9.5%, from 852 to 933. Although not shown in the table,
the proportion of dividend-paying financials/utilities on CRSP fell from 79.9% to
71.6% over 19782000, a decline that occurred because the increase in listed firms
proportionately exceeds the increase in these payers. Because the precipitous decline
in the number of dividend-paying industrials is not matched by a similar decline for
financials/utilities, it cannot simply reflect a general increase in managers reluctanceto pay dividends, but must instead relate to some underlying fundamental change(s)
largely confined to industrial firms. For example, income tax law changes that had
similar effects on nonindustrial and industrial firms incentives to pay dividends
cannot explain the secular trends in Table 1.
Fig. 1 tracks aggregate dividends, earnings, and losses for industrial firms on
CRSP/Compustat over 19502000, as well as total earnings for the subset of
dividend-paying industrial firms. The CRSP/Compustat population expands in 1962
(when CRSP added AMEX firms to its coverage of NYSE firms) and again in 1972
(when NASDAQ firms were added), but remains unchanged post-1978, when the
number of payers fell by more than 50%. The figure shows that (i) aggregatedividends increased steadily over the full period 19502000, including the 19782000
subperiod, (ii) the long-term growth in aggregate dividends reflects the underlying
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growth in earnings, although as expected, dividends grew more smoothly than
earnings, (iii) dividend payers account for the vast bulk of industrial earnings in all
years [as in Fama and French (2001a, p.18)], and (iv) aggregate losses increased
markedly from 1978 to the early 1990s, reaching massive levels in the late 1990s. In
the remainder of the paper, we compare aggregate industrial dividends for 1978 and
2000, since the former year marks the beginning of the long-term decline in the
number of payers and the latter year has the latest available data. As Fig. 1 shows,
there is nothing unusual about aggregate dividends in these two years. Rather, theincrease from 1978 to 2000 is simply part of a steady long-run uptrend in aggregate
dividends paid by industrial firms.
ARTICLE IN PRESS
Table 1
Number of dividend-paying firms over 19782000: CRSP sample partitioned by industrial versus financial
and utility firms
For each year, the table includes NYSE, NASDAQ, and AMEX firms on CRSP that have CRSP sharecodes 10 or 11 and that meet the other sampling criteria described in the paper. The sample of financial
and utility firms includes those with SIC codes in the ranges 49004949 or 60006999, while the sample of
industrial firms includes those with SIC codes outside these ranges.
CRSP industrial CRSP financial CRSP NASDAQ
Year firms and utility firms total NYSE industrials and AMEX
industrials
1978 2,250 852 3,102 1,015 1,235
1979 2,160 841 3,001 1,004 1,156
1980 2,050 835 2,885 982 1,068
1981 1,936 815 2,751 951 985
1982 1,820 780 2,600 911 909
1983 1,712 784 2,496 870 842
1984 1,672 794 2,466 856 816
1985 1,562 817 2,379 815 747
1986 1,434 833 2,267 761 673
1987 1,363 979 2,342 709 654
1988 1,306 1,020 2,326 684 622
1989 1,271 1,015 2,286 663 608
1990 1,234 941 2,175 651 583
1991 1,177 863 2,040 642 535
1992 1,219 865 2,084 679 540
1993 1,218 959 2,177 691 527
1994 1,245 1,042 2,287 717 528
1995 1,265 1,103 2,368 745 520
1996 1,214 1,136 2,350 750 464
1997 1,170 1,110 2,280 744 426
1998 1,111 1,072 2,183 727 384
1999 1,038 1,022 2,060 699 339
2000 926 933 1,859 626 300
Absolute change 1,324 +81 1,243 389 935
over 19782000
Percent change 58.8% +9.5% 40.1% 38.3% 75.7%
over 19782000
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-200
-150
-100
-50
0
50
100
150
200
250
300
350
1950 1955 1960 1965 1970 1975 1980 1985
Aggregate dividends
Billionsofdollars
Aggregate earnin
Total earnings of dividend payers
Aggrega
Fig. 1. Aggregate dividends, aggregate earnings, aggregate losses, and total earnings for dividend payers: Industrial
The sample includes NYSE, NASDAQ, and AMEX firms on CRSP that have share codes 10 or 11. Industrial firms are
the ranges 49004949 and 60006999 (financial and utility companies). The sample is restricted to firms for which Co
earnings before extraordinary items (Compustat items 21 and 18) for the year in question. For each year, the data in thassignment, whereas the data in all other tables are generated under the Fama and French (2001a, p. 40) convention o
on the calendar year in which the fiscal year-end falls. The alternative year-end conventions have little effect on the aggr
that we analyze. Total earnings for dividend payers are the sum of earnings for all firms that pay a positive dividen
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Table 2 documents that aggregate nominal dividends increased by 224.6% for
CRSP/Compustat industrial firms, from $31.3 billion in 1978 to $101.6 billion in
2000, while aggregate real dividends (here and throughout denominated in 1978
dollars) increased by 22.7%, to $38.4 billion.2 The mean real dividend paid (per
dividend-paying firm) increased from $14.4 million in 1978 to $41.4 million in 2000,
while the median increased from $1.4 million to $3.6 million. The difference in meanand medianand the large expansion in that difference over 19782000reflects
substantial dividend concentration in 1978 and a large increase therein over 1978
2000, both of which we document in the next section. NYSE firms account for 66.0%
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Table 2
Aggregate dividends in 1978 and 2000 and related descriptive statistics: Industrial firms on CRSP/
Compustat
The sample includes NYSE, NASDAQ, and AMEX firms on CRSP that have share codes 10 or 11, andSIC codes outside the ranges 49004949 and 60006999. The sample is restricted to firms for which
Compustat reports dividends and earnings before extraordinary items (Compustat items 21 and 18) for
each year in question. Real dividends in 2000 are nominal dividends converted to 1978 dollars using the
consumer price index. The CRSP/Compustat sample assigns each firm to 1978 (or 2000) based on the date
of its fiscal year-end, while the CRSP sample assigns a December 31 year-end for all firms. Since most firms
have a December 31 year-end, the number of dividend-paying firms on CRSP/Compustat can exceed the
number on CRSP (which is the case here for 2000 as a comparison of Tables 1 and 2 indicates).
1978 2000 Absolute (%)
change
1. Aggregate nominal dividends $31.3 billion $101.6 billion $70.3 billion
($ billions) (+224.6%)
2. Aggregate real dividends $31.3 billion $38.4 billion $7.1 billion
($ billions, 1978 base) (+22.7%)
3. Mean real dividend $14.4 million $41.4 million $27.0 million
($ millions, per dividend-paying firm) (+187.5%)
4. Median real dividend $1.4 million $3.6 million $2.2 million
($ millions, per dividend-paying firm) (+157.1%)
5. Number of dividend-paying 2,176 930 1,246
industrials on CRSP/Compustat (57.3%)
6. Percent of all CRSP/Compustat 65.1% 19.4% 45.7%
industrials that paid dividends
7. Percent of dividend-paying 45.0% 66.0% +21.0%
industrials that are NYSE-listed
8. Percent of total dollar dividends 94.7% 97.4% +2.7%
accounted for by NYSE-listed firms
2Fama and Frenchs (2001a) approach of screening for firms with CRSP share codes 10 or 11 and
matching with Compustat data offers protection against the possibility that changes in Compustats
coverage over time drive the results. For example, since Compustat has recently added many foreign firms
with ADRs that pay large dividends, the aggregate dividend increase for the full Compustat population is
misleadingly large. The aggregate dividend comparisons in Table 2 do not suffer from this problem, as
they were generated using Fama and Frenchs sampling approach. Nor are they substantively affected by
the loss of CRSP firms with data unavailable on Compustat. Using CRSP dividend data for the latter
firms, we find that the $7.1 billion real dividend increase from 1978 to 2000 (reported in Table 2) narrows
by only $129 million, so that real dividends increased for the full set of CRSP firms.
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of payers and 97.4% of aggregate dividends in 2000, up respectively from 45.0% and
94.7% in 1978. The fact that NYSE firms pay the overwhelming majority of
industrial dividends likely reflects the tendencies for older and more stable (thus
typically dividend-paying) firms to list their shares on the NYSE, and for young andgrowing (thus typically not dividend-paying) firms to trade on NASDAQ.
3. Dividend concentration and the increase therein over the last two decades
Table 3 ranks dividend-paying industrial firms by cash dividends paid in 1978 and
2000, in groups of 100 firms. For each ranked group in 1978 and 2000, the first two
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Table 3
Concentration of total dollar dividends paid by industrial firms in 1978 and in 2000
Firms are ranked from the largest to smallest total dollar dividends paid in each year (per Compustat). The
sample includes NYSE, NASDAQ, and AMEX firms on CRSP that have share codes 10 and 11 and SIC
codes outside the ranges 49004949 and 60006999. A firm is included only if Compustat reports dividends
and earnings before extraordinary items for the year in question (Compustat items 21 and 18). A firms
dividends are the amounts reported for the fiscal years ending in 1978 or 2000. For 2000, the row
corresponding to firms ranked from 901 to 1000 has 30 firms because there are 930 dividend payers that
meet our sampling criteria in 2000. Each cell amount is rounded to the nearest significant digit, which
explains a few minor discrepancies across row or column total figures.
Dividend
ranking
Percent of
total dividends (%)
Cumulative % of
total dividends (%)
Real dividends
($ millions, 1978 base)
1978 2000 1978 2000 1978 2000
Top 100 67.3 81.8 67.3 81.8 $21,111 $31,477
101200 11.8 10.1 79.1 92.0 3,691 3,889
201300 6.3 3.9 85.4 95.8 1,970 1,492
301400 4.0 1.9 89.4 97.7 1,247 748
401500 2.8 1.0 92.2 98.8 865 401
501600 1.9 0.6 94.0 99.4 585 223
601700 1.4 0.3 95.4 99.7 431 132
701800 1.0 0.2 96.4 99.9 325 70
801900 0.8 0.1 97.2 99.9 249 29
9011000 0.6 o0.1 97.8 100.0 192 110011100 0.5 98.3 153
11011200 0.4 98.7 120
12011300 0.3 99.0 96
13011400 0.2 99.3 76
14011500 0.2 99.5 61
15011600 0.2 99.6 49
16011700 0.1 99.7 40
17011800 0.1 99.8 31
18011900 0.1 99.9 23
19012000 0.1 99.9 16
20012100 o0.1 99.9 10
21002176 o0.1 100.0 2Total for all firms 100.0 100.0 100.0 100.0 $31,343 $38,461
Number of firms 2,176 930
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columns report the percent of dividends paid, the middle two columns report the
cumulative percent, and the last two columns report total real dividends. Overall, a
relatively small number of firms pays the overwhelming majority of aggregate
industrial dividends, and this concentration has increased substantially over the lasttwo decades. For example, in 2000, the top 100 dividend payers distributed 81.8% of
dividends, up from 67.3% in 1978. The $31.5 billion in real dividends paid by the top
100 dividend payers in 2000 ($83.2 billion in year 2000 dollars) exceeds the $31.3
billion paid in 1978 by all 2,176 dividend payers. For the top 100, dividends
increased by $10.4 billion (49.1%), or more than triple the $3.3 billion dividend
decline for all ranks below the top 100. Since virtually all of the increased dividend
concentration is driven by the top 100 or 200 payers, this concentration increase is
obviously not an artifact of the reduction in the number of payers.
Table 4 summarizes the cross-sectional distributions of dividends in 1978 and in
2000, with dividend-paying firms categorized by real dollar dividends paid, ranging
from $500 million-plus per year to less than $1 million per year. The table documents
that the number of firms paying dividends of $100 million-plus increased by 34 over
19782000, for a dividend increase of $12.6 billion. Over the same period, the number
of firms paying less than $100 million decreased by 1,280 and this decline manifests
primarily in the two smallest dividend classes, with the 1,069 net reduction in firms
paying less than $5 million per year accounting for 85.8% of the overall net decline of
1,246 firms. And while the 1,069-firm reduction in small payers is large in number, the
dollar magnitude of the $1.1 billion in dividends lost is dwarfed by the $12.6 billion in
dividends gained from the 34-firm increase for the $100 million-plus category.In sum, the top categories of dividend payers now contain more firms and these
firms now pay substantially higher total dividends, while the bottom categories now
contain many fewer firms and these firms now pay modestly lower total dividends.
The net result is a large decrease in the number of payers accompanied by an increase
in aggregate dividends, which reflects the fact that the top-end firms dominate, while
the bottom-end firms have little impact on the aggregate dividend supply. Black and
Scholes (1974) and Miller (1977) argue that what matters to investors is the
aggregate supply of securities with particular characteristics (e.g., dividends, taxable
interest returns, etc.), and not the number of firms delivering that supply or the
quantity delivered by any one firm. In their view, the decline in the number of payersis of little consequence so long as sufficient dividends are supplied to meet the
demand for dollars delivered currently in that form. Since aggregate real dividends
increased over 19782000, the decrease in the number of payers was not caused by a
reduction in aggregate demand, but instead must reflect changes in the factor(s) that
determine firms dividend supply decisions.
4. Dividend and earnings concentration and payout ratios
Lintners (1956) finding that firms dividend supply decisions primarily depend onearnings suggests that the high/increasing dividend concentration we observe may be
the result of high/increasing earnings concentration. The evidence reported in this
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Table 4
Number of firms and real dividend payments in 1978 and in 2000 for samples of industrial firms that paid given amo
dollars)
The sample is comprised of NYSE, NASDAQ, and AMEX firms on CRSP with share codes 10 or 11 and SIC codes ou
6999. A firm is included only if Compustat reports dividends and earnings before extraordinary items for the year in qu
firms dividends are the amounts reported for the fiscal years ending in 1978 or 2000. Real dividends are given in millionconverted to 1978 dollars using the consumer price index. Each cell amount is rounded to the nearest significant digit, w
across category totals.
Real dividend payment Number of Number of Change from Percent change Real Rea
(1978 dollars) firms 1978 firms 2000 1978 to 2000 from 1978 to dividends divide
2000 (%) 1978 200
1. $500 million or more 6 16 10 166.7 $9,095 $17,5
2. $400$499.9 million 4 4 0 0.0 1,717 1,8
3. $300$399.9 million 4 6 2 50.0 1,441 2,0
4. $200$299.9 million 9 13 4 44.4 2,099 3,0
5. $100$199.9 million 19 37 18 94.7 2,630 5,0
6. $80$99.9 million 18 10
8
44.4 1,591 87. $60$79.9 million 24 21 3 12.5 1,649 1,4
8. $40$59.9 million 55 36 19 34.5 2,642 1,7
9. $20$39.9 million 108 66 42 38.9 3,003 1,8
10. $10$19.9 million 161 94 67 41.6 2,233 1,3
11. $59.9 million 187 115 72 38.5 1,344 8
12. $1$4.9 million 633 276 357 56.4 1,523 6
13. Less than $1 million 948 236 712 75.1 375
Total 2,176 930 1,246 57.3 $31,342 $38,4
$100 million and above 42 76 34 81.0 $16,982 $29,5
Less than $100 million 2,134 854 1,280 60.0 14,360 8,8
Less than $5 million 1,581 512 1,069 67.6 $1,898 $7
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and the next section strongly supports this hypothesis, indicating that (i) 1978
earnings are highly concentrated and 2000 earnings are considerably more so, (ii) the
cross-sectional distribution of 2000 earnings is dominated by firms at the extremes,
(iii) 28 firms with $1 billion-plus in real earnings generated the majority of 2000aggregate earnings, (iv) these 28 top earners paid 50.1% of aggregate dividends in
2000, although 14.3% are nonpayers (up from 0.0% nonpayers among the top
earners in 1978), (v) 2000 aggregate earnings exceed those of 1978, with most of the
increase coming from firms at the top end of the earnings distribution, and (vi) for
dividend-paying firms, the typical payout ratio is little changed over the past two
decades.
Table 5 ranks dividend-paying firms by their earnings in 1978 and 2000, in a format
similar to that ofTable 3. Like dividends, earnings were highly concentrated in 1978,
and substantial additional earnings concentration has occurred among dividend
payers over the last two decades. In 1978, the top 100 dividend payers generated
57.5% of the earnings of all payers, while cumulatively the top 200 payers generated
71.0%. The corresponding figures for 2000 are 74.0% and 86.0%. From 1978 to 2000,
the total real earnings of the 100 largest payers increased markedly, from $47.5 billion
to $80.2 billion. The next two groups also show real increases, albeit of considerably
more modest magnitudes, while all remaining groups show decreases. The net result is
a 31.0% increase in the real earnings of dividend payers, from $82.7 billion in 1978 to
$108.3 billion in 2000 (to $286.0 billion in year 2000 dollars).
4.1. The pooled earnings distribution of dividend payers and nonpayers
As background for our analysis of the earnings of dividend payers and nonpayers,
Table 6 summarizes the cross-sectional earnings distribution of all firms (payers and
nonpayers) combined. Panel A contains the pooled earnings distributions for 1978
and 2000. Since Lintners (1956) analysis indicates that dividends tend to be set in
response to long-run earnings rather than to a single (possibly aberrant) earnings
realization, panel B reports the pooled distribution of average five-year earnings
ending in 1978 and in 2000. The five-year averages are especially useful here because
in 2000 industrial firms reported remarkably large losses (see Fig. 1), which may be a
transitory phenomenon. If so, five-year average earnings better measure firms long-run ability to pay dividends than do one-year earnings realizations.
Table 6 indicates that earnings in both 1978 and 2000 are concentrated among a
relatively few firms at the top end of the distribution, and that such concentration is
notably greater in 2000 than it was in 1978. The aggregate real earnings of payers
and nonpayers combined increased from $85.0 billion in 1978 to $97.8 billion in 2000
($258.3 billion in year 2000 dollars), while aggregate five-year average real earnings
increased from $75.1 billion to $91.6 billion. These aggregate increases are driven by
firms at the top end of the earnings distribution, especially in the $500 million-plus
earnings categories, which show a total increase over 19782000 of $55.1 billion
(182.8%) in one-year earnings, and $30.2 billion (117.2%) in five-year averageearnings. These top-end increases far exceed the net aggregate increase in real
earnings for all industrials as a group, and they comprise more than three-quarters of
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the large total earnings increase among firms with positive earnings. A similar
picture emerges for firms with positive one-year earnings, a group that generated
$86.1 billion in 1978 and $152.8 billion in 2000 real earnings, for an increase of $66.7
billion, or 77.5%, while those firms with positive five-year earnings generated an
increase of $38.5 billion, or 50.9%.
The 2000 earnings distribution is concentrated at both the top and the bottom,
with a full 44.7% of firms reporting losses. Strikingly, the dollar masses at theextremes are quite large and are roughly the same order of magnitude, although they
are generated by a radically different number of firms. The 28 firms at the top earned
ARTICLE IN PRESS
Table 5
Concentration of earnings of industrial firms that paid dividends in 1978 and in 2000
Firms are ranked from the largest to smallest total dollar dividends paid in each year (per Compustat). The
table reports the percent of total earnings generated by dividend-paying firms that are accounted for by thetop 100 dividend payers, the next largest 100 payers, and so on. The sample includes NYSE, NASDAQ,
and AMEX firms on CRSP that have share codes 10 and 11 and SIC codes outside the ranges 49004949
and 60006999. A firm is included only if Compustat reports dividends and earnings before extraordinary
items for the year in question (Compustat items 21 and 18). A firms dividends and earnings are the
amounts reported for the fiscal years ending in 1978 or 2000. For 2000, the row corresponding to firms
ranked from 901 to 1000 has 30 firms because there are 930 dividend payers that meet our sampling criteria
in 2000.
Dividend ranking Percent of total earnings
of dividend-paying
Cumulative % of total
earnings of dividend-paying
Real earnings
($ millions, 1978 base)
industrial firms (%) industrial firms (%)
1978 2000 1978 2000 1978 2000
Top 100 57.5 74.0 57.5 74.0 $47,543 $80,158
101200 13.5 12.0 71.0 86.0 11,170 12,912
201300 7.2 6.2 78.2 92.2 5,929 6,733
301400 5.1 3.0 83.3 95.1 4,242 3,197
401500 3.8 2.2 87.1 97.3 3,134 2,376
501600 2.5 1.4 89.6 98.8 2,045 1,540
601700 2.0 0.5 91.6 99.3 1,694 545
701800 1.5 0.4 93.1 99.7 1,274 482
801900 1.4 0.2 94.5 99.9 1,134 263
9011000 1.0 o0.1 95.5 100.0 819 45
10011100 0.8 96.3 69411011200 0.7 97.1 617
12011300 0.6 97.7 506
13011400 0.5 98.2 440
14011500 0.4 98.6 293
15011600 0.3 98.9 269
16011700 0.3 99.2 248
17011800 0.2 99.4 170
18011900 0.2 99.6 173
19012000 0.2 99.8 138
20012100 0.1 99.9 69
21012176 0.1 100.0 100
Total for all firms 100.0 100.0 100.0 100.0 $82,701 $108,251
Number of firms 2,176 930
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ARTICLE IN PRESS
Table 6
Cross-sectional distributions of firms real earnings (1978 dollars) in 1978 and in 2000:
Industrial firms on CRSP/Compustat
Panel A reports the distributions of real earnings in 1978 and in 2000. Panel B reports the distributions offive-year average real earnings ending in 1978 and in 2000. For example, the panel B figure for a given firm
in 2000 equals the average of real earnings over the five years from 1996 to 2000 (or as many of those years
that Compustat reports earnings data on that firm). The sample is comprised of NYSE, NASDAQ, and
AMEX firms on CRSP with share codes 10 or 11 and SIC codes outside the intervals 49004949 and 6000
6999. A firm is included only if Compustat reports dividends and earnings before extraordinary items for
the year in question (Compustat items 21 and 18). A firms dividends and earnings are those amounts
reported for the fiscal years ending in 1978 or 2000. Real earnings are nominal earnings before
extraordinary items converted to 1978 dollars using the consumer price index.
Panel A. Cross-sectional distributions of real earnings in 1978 or in 2000
Real earnings Real earnings as a
Real earnings
Number of firms ($ millions) % of total (%)
(1978 dollars) 1978 2000 1978 2000 1978 2000
1. $1 billion or greater 9 28 $20,781 $64,229 24.4 65.6
2. $500 million - $1 billion 13 30 9,377 21,069 11.0 21.5
3. $250500 million 28 50 9,716 17,094 11.4 17.5
4. $100250 million 121 120 18,235 18,555 21.4 19.0
5. $50100 million 136 176 9,327 12,120 11.0 12.4
6. $2550 million 193 238 6,814 8,325 8.0 8.5
7. $1025 million 388 427 6,261 6,880 7.4 7.0
8. $010 million 2,146 1,582 5,601 4,567 6.6 4.7
9. Negative earnings 306 2,144
1,148
54,991
1.4
56.2
Total 3,340 4,795 $84,964 $97,848 100.0 100.0
Total positive earnings only 3,034 2,651 $86,112 $152,839
Panel B. Cross-sectional distributions of five-year average real earnings ending in 1978 or in 2000
Five year average Real earnings Real earnings as a
real earnings Number of firms ($ millions) % of total (%)
(1978 dollars) 1978 2000 1978 2000 1978 2000
1. $1 billion or greater 9 21 $18,541 $42,709 24.7 46.6
2. $500 million - $1 billion 10 21 7,261 13,328 9.7 14.6
3. $250500 million 22 45 8,115 15,230 10.8 16.6
4. $100250 million 106 92 15,734 14,663 20.9 16.0
5. $50100 million 128 149 8,916 10,243 11.9 11.2
6. $2550 million 179 213 6,425 7,424 8.6 8.1
7. $1025 million 348 367 5,480 5,798 7.3 6.3
8. $010 million 2,147 1,742 5,260 4,862 7.0 5.3
9. Negative earnings 391 2,145 627 22,685 0.8 24.8
Total 3,340 4,795 $75,105 $91,572 100.0 100.0
Total positive earnings only 2,949 2,650 $75,732 $114,256
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$64.2 billion (65.6% of aggregate earnings), while the 2,144 firms at the bottom lost
$55.0 billion (56.2%). This $55.0 billion in losses far exceeds the $1.1 billion total
lost by 306 firms in 1978. This large upsurge in losses is consistent with the findings
of Hayn (1995), Burgstahler and Dichev (1997), Fama and French (2001a,b), andRitter and Welch (2002) who document a substantially increased loss incidence in
recent years. While in 2000 most firms (1,554, not reported in Table 6) lost less than
$10 million, 94 firms lost at least $100 million. Technology firms are prominent
among the latter group, which includes Amazon, Web MD, Webvan, Priceline,
Covad, Akamai, Ariba, JDS Uniphase, Earthlink, Broadcom, PSINet, MP3.Com,
and CMGI. DeAngelo and DeAngelo (1990) and DeAngelo, DeAngelo, and Skinner
(1992) document that losses play a key role in dividend cuts and omissions. These
findings, combined with recent years large increase in the incidence of losses, help
explain why so many fewer industrial firms now pay dividends.
4.2. The separate earnings of dividend payers and nonpayers
The strong link between losses and the failure to pay dividends is evident from
Table 7, which partitions the pooled distributions of real earnings from Table 6 into
separate distributions for dividend payers and for nonpayers. Virtually all (2,056 of
2,144, or 95.9%) firms that reported losses failed to pay a dividend in 2000 (row 9 of
panel A). The view that losses have driven many more firms to forego dividends is
further supported by the fact that in 2000 nonpayers as a group lost $10.4 billion,
while dividend payers as a group earned $108.3 billion.Both panels of Table 7 document a strong positive relation between the level of
earnings and the proportion of firms paying dividends, and they also show that the
relation in 2000 is weaker than it was in 1978. For example, only 2.3% of the firms
with earnings of $100 million-plus failed to pay dividends in 1978, compared to
28.1% in 2000. The fact that a smaller proportion of firms with a given level of real
earnings paid dividends in 2000 than did so in 1978 is consistent with Fama and
Frenchs (2001a) conclusion that industrial firms now exhibit a lower propensity to
pay dividends (although, unlike the estimates of Fama and French, our numbers do
not control for growth opportunities). In 2000, a number of firms with large positive
earnings failed to pay dividends (see rows 13 in both panels of Table 7), whereas nofirms with comparably large earnings failed to do so in 1978.
Despite this reduced propensity to pay, aggregate real dividends increased by $7.1
billion from 1978 to 2000 (per Table 2). Several factors are jointly responsible. Most
fundamentally, aggregate real earnings increased from 1978 to 2000 and, while
earnings are concentrated in 1978, they are more so in 2000. Second, although the
percentage of firms with earnings of $1 billion-plus that pays dividends has fallen
from 100.0% in 1978 to 85.7% in 2000, the percentage remains high, and these firms
earnings have increased substantially, from $20.8 billion in 1978 to $55.7 billion in
2000. Importantly, this groups dividends increased by $8.9 billion (not reported in
the table), despite its reduced fraction of payers, and this amount exceeds the entire$7.1 billion increase in aggregate dividends from 1978 to 2000. In sum, the
substantial increase in real earnings at the top end of the distribution, coupled with
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Table 7
Real earnings (1978 dollars) for industrial firms in 1978 and in 2000: Sample partitioned into dividend payers and no
Panel A reports the distribution of real earnings for payers and nonpayers in 1978 and in 2000. Panel B reports the dist
the five-year period ending with 1978 (or 2000), or over as many of those years as Compustat provides earnings d
NASDAQ, and AMEX firms on CRSP with share codes 10 or 11 and SIC codes outside the intervals 49004949 and 60
year only if Compustat reports data on dividends and earnings (Compustat items 21 and 18). A firms dividends and ethe fiscal years ending in 1978 or 2000. Real earnings are nominal earnings before extraordinary items converted to 1
index. The percentage from payers columns report the percent of total earnings that comes from dividend-paying firm
nearest significant digit, which accounts for a few minor discrepancies across category totals.
1978 Number of firms 2000 Number of firms 1978 Earnings ($ millions)
Real
earnings
Payers Non
payers
Percentage
from
Payers Non
payers
Percentage
from
Payers Non
payers
Percentage
from
(1978 dollars) payers (%) payers (%) payers (%
Panel A. Real earnings distribution for payers and nonpayers in 1978 and in 2000
1. $1 billion or greater 9 0 100.0 24 4 85.7 $20,781 $0 100.0
2. $500 million - $1 billion 13 0 100.0 23 7 76.7 9,377 0 100.0 3. $250500 million 28 0 100.0 38 12 76.0 9,716 0 100.0
4. $100250 million 117 4 96.7 79 41 65.8 17,619 616 96.6
5. $50100 million 130 6 95.6 95 81 54.0 8,961 365 96.1
6. $2550 million 185 8 95.9 113 125 47.5 6,519 295 95.7
7. $1025 million 358 30 92.3 154 273 36.1 5,802 459 92.7
8. $010 million 1,284 862 59.8 316 1,266 20.0 4,404 1,197 78.6
9. Negative earnings 52 254 17.0 88 2,056 4.1 480 668 41.8
Total 2,176 1,164 65.1 930 3,865 19.4 $82,701 $2,263 97.3
Panel B. Five-year average real earnings distribution for payers and nonpayers ending in 1978 and in 2000
1. $1 billion or greater 9 0 100.0 20 1 95.2 $18,541 $0 100.0 2. $500 million - $1 billion 10 0 100.0 19 2 90.5 7,261 0 100.0
3. $250500 million 22 0 100.0 34 11 75.6 8,115 0 100.0
4. $100250 million 105 1 99.1 75 17 81.5 15,579 155 99.0
5. $50100 million 123 5 96.1 96 53 64.4 8,569 347 96.1
6. $2550 million 171 8 95.5 114 99 53.5 6,127 298 95.4
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Table 12. (Continued)
1978 Number of firms 2000 Number of firms 1978 Earnings ($ millions)
Real
earnings
Payers Non
payers
Percentage
from
Payers Non
payers
Percentage
from
Payers Non
payers
Percentage
from
(1978 dollars) payers (%) payers (%) payers (%
7. $1025 million 330 18 94.8 168 199 45.8 5,200 280 94.9
8. $010 million 1,387 760 64.6 361 1,381 20.7 4,376 884 83.2
9. Negative earnings 19 372 4.9 43 2,102 2.0 52 575 8.3
Total 2,176 1,164 65.1 930 3,865 19.4 $73,716 $1,389 98.2
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the continued strong tendency of top earners to pay dividends, is sufficient to
generate an aggregate dividend increase despite both the large reduction in the
number of small dividend payers and the modest increase in the number of firms with
very large earnings that fail to pay dividends.
4.3. Payout ratios and the propensity to pay dividends
The term reduced propensity to pay seems to imply that dividend-paying firms
now distribute a lower proportion of their earnings than they used to.3 That there
has not been a reduced propensity to pay in this sense is clear from the essentially flat
payout ratio data in Table 8. Row 1 of the table reports that the ratio of aggregate
dividends to aggregate earnings of payers and nonpayers combined increased
slightly, both when current year earnings are used in the denominator (from 36.9%
to 39.3%), and when five-year average earnings are used (from 41.7% to 42.0%).4 Ashortcoming of the row 1 payout ratios is that they combine the earnings of payers
and nonpayers and thus provide no information about the time series behavior of the
payout ratios of dividend-paying firms.
Table 8s remaining payout ratios remedy this deficiency by incorporating only the
earnings of dividend-paying firms. Row 2 reports the ratio of aggregate dividends to
the total earnings of dividend payers, while row 3 presents the median of individual
firms payout ratios. Rows 4 and 5 report the same statistics for the constant
composition sample of 474 firms that paid dividends in both 1978 and 2000.
Although the latter sample suffers from a survivorship bias, it also likely captures
genuine changes in payout policy as opposed to differences over time in the
population of dividend-paying firms. The payout ratios in rows 3 and 5 give equal
weight to all observations, while those in rows 2 and 4 give more weight to firms with
large dividends and earnings.
Overall, payout ratios exhibit little change over the last two decades, with some of
the ratios in Table 8 exhibiting slight increases and others slight decreases. Row 2
shows that the ratio of aggregate dividends to total earnings of payers declined 2.4%,
from 37.9% in 1978 to 35.5% in 2000, based on a single years earnings, while the
ratio based on five-year average earnings decreased 0.1%, from 42.5% to 42.4%.
Row 3 indicates that the median payout ratio increased 2.2%, from 26.2% to 28.4%,based on the one-year earnings measure, and decreased 0.7%, from 31.1% to 30.4%,
based on five-year average earnings. For the constant composition sample in rows 4
ARTICLE IN PRESS
3Fama and French (2001a) use reduced propensity to pay in a different sense, to represent the idea
that there are now more firms that pay zero dividends than would have done so historically based on their
economic fundamentals. The payout ratio evidence discussed below is consistent with that of Fama and
French (2001a, p. 38) who find no indication of a decline over 19781998 in the ratio of aggregate
dividends to the total earnings of payers.4When we calculate an aggregate dividend payout ratio using the summed earnings of all payers and
nonpayers with positive earnings, we find a decline from 36.4% in 1978 to 25.2% in 2000 (from 41.4% to
33.7% using five-year average earnings). But these declines reflect the fact that the earnings divisor of this
payout ratio includes the positive earnings of firms that paid no dividends in 2000, including a small
number of very large earners such as Microsoft, which we discuss in Section 5. Hence, these declines are
not evidence that firms that do pay dividends now have lower payout ratios.
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and 5, three of four payout ratios decreased (by 3.6%, 3.4%, and 1.8%) while the
other increased (by 5.5%). For this last sample, the median change in the payout ratio
(as opposed to the change in the median, which is reported in Table 8) is 5.2% from
1978 to 2000 based on one-year earnings and 2.3% based on five-year average
earnings (details not in table). In sum, we find little indication of a substantial change
(up or down) over the last two decades in the payout ratios of dividend-paying firms. 5
ARTICLE IN PRESS
Table 8
Aggregate and median dividend payout ratios for industrial firms on CRSP/Compustat, 1978 and 2000
The payout ratios in rows 1 and 2 are based on aggregate dividends paid by industrial firms in 1978 or in
2000. Row 1 takes the denominator to be the sum of earnings for all industrials (payers and nonpayers),while row 2 takes the denominator to be the sum of earnings for payers only. Row 3 reports the median
firms payout ratio within the set of firms that paid dividends. The payout ratios in row 4 and 5 are based
on dividends and earnings for the constant composition sample of 474 firms that paid dividends in both
1978 and in 2000. Row 4 defines the payout ratio in a given year as (1) total dividends paid by firms in the
constant composition sample divided by (2) total earnings of all firms in that sample. Row 5 reports the
median firms payout ratio within the constant composition sample. The columns marked One-year
earnings report payout ratios based on earnings in the year in question. The columns marked Five-year
average real earnings report payout ratios based on a firms average real earnings over the five years
ending with the year in question (or as many of those years that Compustat reports earnings data for the
firm). For example, for a given firm in 2000, the earnings variable is the average of earnings over the five
years 19962000, with each years earnings converted to 2000 dollars using the consumer price index. The
full sample of industrial firms consists of NYSE, NASDAQ, and AMEX firms on CRSP with share codes10 or 11 and SIC codes outside the intervals 49004949 and 60006999. A firms dividends and earnings
are the amounts reported for the fiscal years ending in 1978 or 2000. A firm is included in a given year only
if Compustat has data on dividends and earnings (Compustat items 21 and 18). Earnings are before
extraordinary items.
Five-year average
One-year earnings (%) real earnings (%)
Payout ratio measure 1978 2000 1978 2000
1. Aggregate dividends/aggregate earnings
(payers and nonpayers pooled)
36.9 39.3 41.7 42.0
2. Aggregate dividends/total earningsof dividend payers
37.9 35.5 42.5 42.4
3. Median firms payout ratio
(dividend payers)
26.2 28.4 31.1 30.4
4. Constant composition sample of firms that
paid dividends in both 1978 and 2000:
total dividends/total earnings of these dividend payers
41.3 37.7 47.0 43.6
5. Constant composition sample of firms that
paid dividends in both 1978 and 2000:
median firms payout ratio
27.5 33.0 33.7 31.9
5Fama and French (2001a, p. 35) study the recent upsurge in stock repurchases and find that repurchase
activity is dominated by dividend-paying firms, so that repurchases increase the already high cash
payouts of payers. Thus, although repurchases have increased in recent years (both absolutely and relative
to dividends), dividend payers have apparently used repurchases to increase the overall fraction of
earnings distributed to stockholders.
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5. The identity of the top payers, nonpayers, and earners in 2000
Table 9 identifies the 25 industrials that paid the largest dividends in 2000, ranked
in descending order of dividends paid. These primary dividend suppliers are well-established firms such as Exxon Mobil and General Electric, with 14 of the 25
included in the Dow Jones Industrial Average (DJIA). The top 25 payers distributed
54.9% of aggregate industrial dividends in 2000, and their $9.2 billion real dividend
increase over 19782000 markedly exceeds the $7.1 billion aggregate increase for
industrials as a whole (per Table 2). Their dominance of the aggregate dividend
supply reflects these 25 firms $50.3 billion in real earnings ($132.8 billion in year
2000 dollars), which is 51.4% of aggregate industrial earnings, and represents a $26.2
billion real earnings increase from 1978 to 2000. Nineteen of the top 25 payers had $1
billion-plus in real earnings for 2000, and the real earnings increases of the top three
alone totaled $9.7 billion over 19782000. In short, a handful of old line firms now
both generates over half of industrial earnings and dominates the associated supply
of dividends.
While earnings concentration is striking among dividend payers, it is also very
high among nonpayers. Table 10 ranks the 25 nonpayers with the highest 2000
earnings, and reports their cumulative share of the earnings of all nonpayers with
positive income. Four nonpayersMicrosoft, the only nonpayer in the DJIA,
Oracle, WorldCom, and Ciscoreported real earnings of more than $1 billion in
2000, and these firms alone account for 20.6% of all positive earnings of nonpayers.
The top 10 and top 25 nonpayers respectively generated 31.0% and 43.2% of suchearnings, and just 39 nonpayers accounted for a majority (50.1%, not reported in
Table 10).6 That a handful of technology firms dominates the earnings of nonpayers
is clear from scanning the identities of the 25 firms in Table 10, and any dampening
of the aggregate dividend supply in recent years is due in no small part to their failure
to initiate dividends.
These firms decisions to forgo dividends more likely reflect their continued high
growth prospects than a reduced propensity to pay dividends and, as their growth
prospects decline, they will likely come under pressure to pay dividends. Microsoft,
widely viewed as a bellwether technology company, has recently announced plans to
institute a regular dividend, and Qualcomm and Fedex have also initiated dividends,so that three of the top 25 nonpayers in Table 10 would now be reclassified as payers.
Additionally, the numerous corporate scandals uncovered in the last year or so may
prompt growth firms to initiate dividends at an earlier stage, in order to increase
investor confidence in their reported earnings. Moreover, President Bushs January
2003 proposal to eliminate the dividend tax penalty would, if enacted, surely put
more pressure on firms to pay dividends. All these recent developments suggest that
a future reversal of the decline in the number of dividend-paying industrials is a
reasonable possibility.
ARTICLE IN PRESS
6The earnings of the top 25 nonpayers represent 11.7% of the earnings of all firms (payers and
nonpayers combined) with positive income, and 18.3% of aggregate industrial earnings.
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Table 9
Dividends and earnings in 1978 and in 2000 for the 25 industrial firms that paid the largest dividends in 2000
The table lists the 25 industrial firms on CRSP/Compustat that paid the largest total dividends in 2000, with firms ranke
All but three of these firms are in our 1978 sample and also paid dividends in that year. [Verizon (Bell Atlantic), SBC, an
in 1978, and are baby bells that were spun off in 1984. AT&Ts real dividends and earnings in 2000 would be well abo
dividends and earnings of the spun off baby bells.] Real dividends and earnings in 2000 are nominal values conver
price index. A firms dividends and earnings are the amounts reported for the fiscal years ending in 1978 or 2000. The ne
give year 2000 dividends and earnings in nominal terms (i.e., denominated in year 2000 dollars).
Real dividends Real earnings
($ millions, 1978 base) ($ millions, 1978 base)
1978 2000 Change 1978 2000 C
1. Exxon Mobil $1,472 $2,318 $846 $2,763 $6,054
2. General Electric 570 2,138 1,568 1,230 4,822
3. Philip Morris 125 1,722 1,597 409 3,222
4. Verizon 1,672 1,672 4,093 5. SBC 1,304 1,304 3,017
6. Merck 132 1,100 968 308 2,583
7. Ford 417 1,036 619 1,589 2,048
8. Pfizer 82 973 890 206 1,408
9. AT&T 3,038 941 2,097 5,273 1,768
10. Bristol Myers Squibb 77 731 654 203 1,551
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11. Johnson & Johnson 101 653 552 299 1,817
12. Chevron 435 639 205 1,106 1,963
13. Coca-Cola 215 638 423 375 824
14. Procter & Gamble 223 636 413 512 1,341
15. Du Pont 348 551 203 787 876
16. BellSouth 539 539 1,598
17. General Motors 1,713 490
1,223 3,508 1,68618. American Home Products 207 455 248 348 341
19. Abbott Labs 47 446 399 149 1,055
20. Eli Lilly 116 439 322 277 1,158
21. Texaco 543 370 173 852 962
22. 3M 234 348 114 563 703
23. IBM 1,763 344 1,419 3,111 3,064
24. Wal-Mart 2 337 335 22 2,111
25. Schering-Plough 65 304 239 194 917
Total for 25 firms $11,925 $21,124 $9,198 $24,084 $50,300 $
Total as a % of aggregate 38.0% 54.9% 28.3% 51.4%
for all industrials
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Table 11 identifies the 28 firms with $1 billion-plus in real earnings in 2000, which
is just over $2.5 billion in year 2000 dollars. Together, these 28 firms account for
almost two-thirds (65.6%) of 2000 aggregate industrial earnings. In 2000, 24 of thesefirms paid dividends, and in total their dividends represent a majority (50.1%) of the
industrial dividend supply. The 28 largest earners are primarily old line firms that
ARTICLE IN PRESS
Table 10
2000 earnings for the 25 nondividend-paying industrial firms with the highest reported earnings
The table lists the 25 nondividend-paying industrial firms on CRSP/Compustat with the highest earnings
in 2000, ranked in descending order of earnings in that year. WorldCom is classified by Compustat as notpaying dividends, even though the tracking stock for its MCI unit did pay dividends in 2000. Our empirical
work employs Compustat dividend amounts for all sample firms. The recent accounting scandal at
WorldCom implies that its year 2000 Compustat earnings are overstated. Real earnings are nominal
earnings in 2000 converted to 1978 dollars using the consumer price index. A firms earnings for 2000 is the
amount reported for the fiscal year ending in that year. The last column gives the cumulative total earnings
as a fraction of the total earnings in 2000 of all nondividend payers with positive earnings in that year. All
earnings figures are before extraordinary items.
Real earnings Nominal earnings Cumulative earnings as a
in 2000 in 2000 percent of total earnings of
($ millions, ($ millions) all nonpayers with positive
1978 base) earnings in 2000 (%)
1. Microsoft $3,567 $9,421 8.6
2. Oracle 2,384 6,297 14.4
3. WorldCom 1,580 4,174 18.2
4. Cisco Systems 1,010 2,668 20.6
5. Applied Materials 781 2,064 22.5
6. Comcast 774 2,045 24.4
7. Cox Communications 729 1,925 26.1
8. Sun Microsystems 702 1,854 27.8
9. EMC 675 1,782 29.5
10. Dell Computer 631 1,666 31.0
11. Micron Technology 570 1,504 32.4
12. AOL Time Warner 466 1,232 33.5
13. Amgen 431 1,139 34.5
14. Safeway 413 1,092 35.5
15. Advanced Micro Devices 381 1,006 36.4
16. ADC Telecommunications 329 868 37.2
17. Federated Department Stores 301 795 38.0
18. Apple Computer 298 786 38.7
19. AMR 295 779 39.4
20. Tellabs 288 760 40.1
21. Agilent Technologies 287 757 40.8
22. Fedex 261 688 41.4
23. Qualcomm 254 670 42.024. Xilinx 247 652 42.6
25. Alliance Semiconductor 245 648 43.2
Total for 25 firms $17,899 $47,273 43.2
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Table 11
Dividends and earnings in 1978 and in 2000 for the 28 industrial firms with at least $1 billion in real earnings in 200
The table lists the 28 industrial firms on CRSP/Compustat that report at least $1 billion in real earnings in 2000, with fi
earnings. Real dividends and earnings in 2000 are nominal values converted to 1978 dollars using the consumer price in
the amounts reported for the fiscal years ending in 1978 or 2000. The next-to-last and last columns respectively give year
terms (i.e., denominated in year 2000 dollars). WorldCom is classified by Compustat as not paying dividends in 2000MCI unit did pay dividends in that year, and we follow Compustats classification. Verizon (Bell Atlantic), Microsof
UPS, and Cisco are not in our 1978 sample. However, Verizon, SBC, and BellSouth are baby bells that were spun o
were subsidiaries of AT&T (which is in the 1978 sample). The numbers are rounded to the nearest significant digit, which
category totals.
Real dividends Real earnings
($ millions, 1978 base) ($ millions, 1978 base)
1978 2000 Change 1978 2000 C
1. Exxon Mobil $1,472 $2,318 $846 $2,763 $6,054
2. General Electric 570 2,138 1,568 1,230 4,822 3. Verizon 1,672 1,672 4,093
4. Intel 0 178 178 44 3,989
5. Microsoft 0 0 3,567
6. Philip Morris 125 1,722 1,597 409 3,222
7. IBM 1,763 344 1,419 3,111 3,064
8. SBC 1,304 1,304 3,017
9. Merck 132 1,100 968 308 2,583
10. Oracle 0 0 2,384
11. Wal-Mart 2 337 335 22 2,111
12. Ford 417 1,036 619 1,589 2,048
13. Chevron 435 639 205 1,106 1,963
14. Johnson & Johnson 101 653 552 299 1,817 15. AT&T 3,038 941 2,097 5,273 1,768
16. Tyco 1 32 31 12 1,711
17. General Motors 1,713 490 1,223 3,508 1,686
18. BellSouth 539 539 1,598
19. WorldCom 0 0 1,580
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Table 12. (Continued)
Real dividends Real earnings
($ millions, 1978 base) ($ millions, 1978 base)
1978 2000 Change 1978 2000 C
20. Bristol Myers Squibb 77 731 654 203 1,551
21. Pfizer 82 973 890 206 1,408
22. Hewlett-Packard 14 242 228 153 1,348
23. Procter & Gamble 223 636 413 512 1,341
24. Texas Instruments 40 53 13 140 1,169
25. Eli Lilly 116 439 322 277 1,158
26. UPS 298 298 1,111
27. Abbott Labs 47 446 399 149 1,055
28. Cisco 0 0 1,010
Total for 28 firms $10,368 $19,261 $8,892 $21,314 $64,229 $
Total as a % of aggregate 33.1% 50.1% 24.8% 65.6%
for all industrials
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pay very large dividends, but they also include some profitable younger technology
firms that pay either modest or no dividends. Of the four large earners that failed
to pay 2000 dividends, Microsoft has since initiated a dividend, Oracle and Cisco
have said they would consider doing so, and WorldComs accounting fraud impliesthat its #19 ranking in Table 11 substantially overstates its true earnings position in
2000.
Overall, industrial firms are characterized by a two-tier structure based on
earnings, with 25 or so firms (about one-half of 1% of all industrials) accounting for
most earnings and dividends in 2000, and with the vast majority of firms collectively
delivering small earnings and dividends. Tables 911 show that the top handful of
earners generated the bulk of corporate earnings and, despite some large earners like
Microsoft that did not pay dividends, also supplied the majority of industrial
dividends in 2000. We also know from Table 6 that 3,726 firms or 77.7% of all
industrial firms in 2000 individually earned $10 million or less, and these firms as a
group lost about $50 billion. These 3,726 firms paid total dividends of $2.1 billion, or
5.5% of the aggregate industrial supply. More than half of this $2.1 billion total was
paid by seven large firms with current losses or very low earnings, and more than
three-quarters was paid by 30 firms in a similar situation (including American Home
Products, Xerox, Lockheed, USX, Dow Jones, and Pennzoil). Therefore, in 2000,
some 3,700 firms (over three-quarters by number) collectively paid dividends of
about $0.5 billion (1.3% of the aggregate), whereas the top 25 payers (0.5% by
number) paid roughly 40 times that amount.
6. What happened to the dividend payers of 1978?
Table 12 classifies the 2,176 firms that paid dividends in 1978 (column (1))
according to whether they also paid dividends in 2000 (column (2)), remained listed
in 2000 but did not pay dividends in that year (column (3)), and the primary reasons
for delisting, either financial distress (column (4)) or acquisition (column (5)).
Financially distressed delists include all firms with CRSP delist codes 500599
(delisted or stopped trading) or 400499 delist codes (liquidations) for which The
Wall Street Journal Index (WSJI) provides no clear indication that the firm wasacquired. Acquisition delists include all firms with delist codes 200299 (mergers), or
300499 (security exchanges and liquidations) for which the WSJI indicates that the
company was acquired.7
Although much reduced in number, the set of 474 firms that paid dividends in
both 1978 and 2000 accounts for a large majority of industrial dividends and
earnings in 2000 (79.5% and 83.1% respectively)another manifestation of the fact
ARTICLE IN PRESS
7This classification scheme is similar to that of Fama and French (2001b, Table 4), who treat codes 200
399 as delisted due to merger and 400599 as delisted for cause. The 1,647 firm total of columns (3)(5)
in our Table 12 falls 55 firms short of the 1,702 firm difference between columns (1) and (2). The reason is
that we omit 40 delists with codes 300399 that the WSJI did not show as acquired and 15 firms without
dividends and earnings on Compustat for 2000. The former firms had paid $136 million in 1978 dividends,
while the latter had paid $254 million.
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ARTICLE IN PRESS
Table 12
Listing and dividend status in 2000 for the 2,176 industrial firms that paid dividends in 1978: Sample
partitioned by size of 1978 dividend payment
The sample includes all NYSE, NASDAQ, and AMEX firms on CRSP that have share codes 10 and 11and SIC codes outside the ranges 49004949 and 60006999, and that have nonmissing values on
Compustat of dividends and earnings before extraordinary items for 1978 (Compustat items 21 and 18).
Column (2) contains firms that were in our sample in 1978 and in 2000, and that paid dividends in both
years. Column (3) contains firms that paid dividends in 1978 and that remained publicly traded in 2000,
but no longer paid dividends. Columns (4) and (5) contain dividend-paying firms that are in our 1978
sample, but that were delisted post-1978 due either to acquisition or financial distress, and thus are not in
the 2000 sample. The financially troubled delistings in column (4) include (i) all cases with CRSP delist
codes in the range 500599 and (ii) those cases with delist codes in the range 400499 for which we found
no evidence in the Wall Street Journal Index (WSJI) that the firm was acquired. The acquisition delistings
in column (5) include (i) all cases with CRSP delist codes in the range 200299 and (ii) those cases with
CRSP delist codes in the range 300499 for which we found evidence in the WSJI that the company was
acquired. The subsamples in columns (2) through (5) are mutually exclusive, but not exhaustive. Theyexclude 40 firms with delist codes in the range 300399 for which we found no evidence in the WSJI that
the firm was acquired. They also exclude 15 firms for which Compustat does not report dividends and
earnings data for 2000. A firms dividends and earnings are the amounts reported for the fiscal years
ending in 1978 or 2000. Real dividends and earnings in 2000 are nominal values converted to 1978 dollars
using the consumer price index.
Listed, but Delisted
All
dividend
Paid
dividends
not dividend
payer
due to
financial
Delisted
due to
Dividend payment payers in 1978 in 2000 in 2000 distress acquisition
in 1978 (1) (2) (3) (4) (5)
1. $500 million or greater 6 6 0 0 0
2. $400499.9 million 4 2 0 0 2
3. $300399.9 million 4 3 0 0 1
4. $200299.9 million 9 6 0 0 3
5. $100199.9 million 19 14 0 0 4
6. $8099.9 million 18 12 0 0 6
7. $6079.9 million 24 9 5 0 10
8. $4059.9 million 55 19 4 1 29
9. $2039.9 million 108 37 7 1 61
10. $1019.9 million 161 58 5 9 84
11. $59.9 million 187 51 9 7 118
12. $14.9 million 633 143 43 46 38913. Less than $1 million 948 114 86 175 542
Total number of firms 2,176 firms 474 firms 159 firms 239 firms 1,249 firms
(% of 1978 industrial total) (100.0%) (21.8%) (7.3%) (11.0%) (57.4%)
Total 1978 dividends $31.3 billion $19.5 billion $1.0 billion $0.4 billion $10.0 billion
(% of 1978 industrial total) (100.0%) (62.3%) (3.2%) (1.3%) (31.9%)
Total 2000 real dividends $30.6 billion $0.0 billion
(% of 2000 industrial total) (79.5%) (0.0%)
Total 1978 earnings $82.7 billion $47.3 billion $3.9 billion $1.3 billion $28.9 billion
(% of 1978 industrial total) (97.3%) (55.7%) (4.6%) (1.5%) (34.0%)
Total 2000 real earnings $81.3 billion $2.0 billion
(% of 2000 industrial total) (83.1%) (2.0%)
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that dividends and earnings are highly concentrated among old line firms. The 159
firms that stopped paying dividends between 1978 and 2000 had paid only $1.0
billion (3.2% of the aggregate) in 1978. These firms 2000 nonpayments reflect
financial distress for at least some companies, since 2000 total earnings were nearly50% below 1978 earnings for this group. Most of the 239 financially distressed delists
were small payers, with 221 firms (92.5%) having paid $5 million or less, and these
firms 1978 dividends totaled $0.4 billion, or 1.3% of the aggregate. So, while
financial distress and earnings difficulties together reduced the number of dividend
payers by 398 firms between 1978 and 2000, the associated dividend loss is just $1.4
billion. The $10.0 billion (31.9%) dividend loss from acquisition delists is markedly
larger, as is the loss in the number of payers due to acquisitions (1,249 firms, or
57.4% of the 1978 payers).
While acquisitions are thus the primary, and financial distress the secondary,
reason why so many 1978 payers no longer disburse dividends, these two factors
affect aggregate dividends in different ways. The dividends of financially distressed
firms are lost, whereas in many cases an acquired firms dividends are not lost, but
are simply relabeled. For example, the issuance of acquirer shares to target
stockholders increases the acquirers total dividend, and thereby continues the
targets dividend at least in part.8 Exxon and Mobil respectively paid $4.0 billion and
$1.8 billion in 1998 dividends, while after their November 1999 merger, the new
Exxon Mobil paid $6.1 billion in 2000 dividends. In the aggregate, such acquisitions
do not eliminate dividends, but simply channel them to investors through a smaller
number of firms. Thus, acquisitions reduce the number of dividend-paying firms withno necessary reduction in aggregate dividends, a point that carries special
significance here because the post-1978 decline in the number of payers occurred
during a massive merger wave.
In fact, the merger wave of the 1980s and 1990s explains a substantial portion
of the decline in the number of dividend payers over 19782000. The abnormal
number of delists attributable to the merger wave equals the actual merger delists
(1,249 firms, per Table 12) minus the number of mergers that would have occurred,
absent the wave. Fama and French (2001a, Table 2) report that dividend payers were
acquired at average annual rates of 3.9% over 19781999, 2.7% over 19631977,
and 0.6% over 19271962. The normal merger rate probably lies somewherebetween 0.6% and 2.7% since 19271962 is a wave-free period, while 19631977
includes the conglomerate wave. If 0.6% is the relevant benchmark, the abnormal
delists attributable to the recent merger wave is 979 firms, and it is 265 firms if 2.7%
is the appropriate benchmark.9 In either case, a reasonable portion of the actual
ARTICLE IN PRESS
8Acquisitions for stock were especially prevalent in the 1990s. Andrade et al. (2001, pp. 104106) report
that 57.8% of acquisitions over 19901998 were for all stock, while 70.9% involved at least some stock.
They also report that, during the 1980s, 32.9% of acquisitions were for all stock, and 45.6% involved some
stock.9We calculate the expected attrition (compounded at either 0.6% or 2.7%) over 22 years starting from a
base of 2,176 firms, the number of 1978 payers. The abnormal number of acquisitions equals 1,249 minus
the expected attrition. The expected attrition at Fama and Frenchs 3.9% merger rate over 19781999 is
1,269 firms, which is virtually identical to the 1,249-firm decline in Table 12.
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merger delists, hence of the decline in the number of dividend payers, is due to
the recent merger wave. However, as Fama and French (2001a, p.11) point out,
since dividend payers and nonpayers were acquired at about the same rates during
the last two decades, acquisitions cannot explain the decline in the proportion ofpayers.
7. Summary and implications
This paper reports evidence that industrial firms dividends are highly
concentrated, and that dividend concentration has increased over the past two
decades. We document that, while many fewer firms paid dividends in 2000 than did
so in 1978, aggregate real dividends increased over that period. The combination of a
decreased number of payers and increased aggregate dividends reflects high and
increased earnings concentration. In 2000, most firms with very high earnings paid
dividends, and the increased real earnings of the largest dividend payers is
responsible for the aggregate increase in dividends and the concomitant increase in
dividend concentration over 19782000. In 2000, nearly half of industrial firms
reported losses and, as one would expect, few of these firms paid dividends. The
decline over 19782000 in the number of dividend payers occurred predominantly
among firms that previously paid very small real dividends, and is due primarily to
acquisitions and secondarily to financial distress. For example, we find that 57.4% of
the firms that paid dividends in 1978 were subsequently delisted because they wereacquired, and that the abnormal level of acquisitions during the recent merger
wave accounts for much, but not all, of the decline in the number of payers. We also
find that the payout ratios of firms that pay dividends exhibit little change over
19782000.
These findings collectively suggest that the decline in dividend payers over 1978
2000 is not attributable to factors that put across-the-board downward pressure on
dividends or on payout ratios. For example, income tax law changes cannot
plausibly underlie the decline in payers, since any increase in the dividend tax penalty
that led many more firms to pay zero dividends also should have led dividend payers
to markedly reduce their payout ratios, and we observe no such reduction. The samelogic implies that the sharp reduction in the number of payers was not caused by
demand- and/or supply related factors that generated a cross-sectionally pervasive
reduction in the marginal incentive to pay dividends. This inference is reinforced by
the fact that the earnings of nonpayers, like those of payers, are highly concentrated,
with 25 firms accounting for almost half the total earnings of all nonpayers with
positive earnings in 2000. Over one-third of these total earnings come from just 13
firms with a strong technology bent: Microsoft, Oracle, WorldCom, Cisco, Applied
Materials, Comcast, Cox Communications, Sun, EMC, Dell, Micron Technology,
AOL Time Warner, and Amgen. The decision to forgo dividends by high growth
technology firms with substantial earnings more likely reflects industry-specificinvestment opportunities rather than economy-wide factors that reduced all firms
incentives to pay dividends.
ARTICLE IN PRESS
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Our findings on dividend concentration cast doubt on the empirical importance of
the dividend clientele and signaling hypotheses (Allen and Michaely, 1995, survey
the extensive literatures on these two hypotheses). Clientele theories attribute
heterogeneity in dividend policies to the demands of different investors who, for taxor behavioral reasons, prefer either to hold or to avoid dividend-paying stocks. Black
and Scholes (1974) discuss the difficulties of forming well-diversified portfolios of
stocks that pay either high or low dividends, and note the dearth of nondividend
payers to service the demands of the many investors who prefer capital gains. While
on the surface the large increase since the late 1970s in the number of nondividend-
paying firms might appear to rectify this shortcoming, the attributes of the current
population of nonpayers suggest that well-diversified portfolios of their stocks are
not easily constructed. Among nonpayers in 2000, the majority of firms has negative
earnings averaged over 19962000, many are newly listed growth firms, and many
are from the technology sector. Even if some investors could construct well-
diversified but dividend-free portfolios from this population, it is questionable
whether the aggregate demands of all clienteles seeking to invest in such portfolios
could be met, given the substantial dividend concentration that characterizes todays
stock market.
If the demand to satisfy heterogeneous clienteles were truly a first-order
determinant of dividend policies, we would expect to observe substantial dividend
heterogeneity among the prominent firms whose securities are important compo-
nents of well-diversified portfolios. As long as high tax bracket investors desire to
invest substantial amounts of wealth, we should observe a comparably large set ofprominent firms that do not pay dividends, and these nonpayers should be spread
across a broad spectrum of industries. And, within any given industry, we should see
a mix of large dividend-paying and nonpaying firms. What we observe, instead, is (i)
few firms with very high earnings fail to pay dividends, (ii) these firms are mainly
bunched in a narrow industry sector (technology), and (iii) very large firms in other
industries all tend to pay dividends. The fact that the market does not supply a broad
spectrum of dividend heterogeneity either across or within industries suggests that
pressure to satisfy heterogeneous clienteles is at best a second-order determinant of
dividend decisions. It would seem to follow that clientele pressure can have a major
impact only in unusual circumstances, for example, when a controlling stockholderspreferences shape a given firms dividend policy as, e.g., in DeAngelo and DeAngelo
(2000).
Our finding that dividends are highly concentrated among a small number of firms
with substantial earnings also raises doubts that signaling is a first-order determinant
of corporate dividend policy. If managers use dividends to communicate with
stockholders, dividend signaling should occur primarily in small, relatively unknown
firms with limited access to the financial press, Wall Street analysts, and other
conventional information dissemination outlets. But the vast majority of dividends
are paid by prominent corporations like Exxon Mobil and General Electric that
enjoy major coverage by analysts and journalistsexactly the firms whose managersshould have little need to use financial decisions to communicate with investors. How
much of aggregate dividends can be motivated by signaling when 92.0% of industrial
ARTICLE IN PRESS
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dividends are paid by the top 200 dividend payers? While it is possible that signaling
motives may be important on the margin for some prominent dividend-paying firms,
it is hard to envision plausible scenarios in which a material portion of aggregate
dividends reflects signaling motives.Our evidence on the high and increasing level of dividend concentration adds to a
growing body of empirical research that documents major changes in corporate
payout practices over the last 2550 years. Prior studies have identified a number of
other important trends, including (i) a marked reduction in the 1970s in the
sensitivity of dividends to earnings, as evidenced by a decline in the typical Lintner
(1956) speed-of-adjustment coefficient coupled with target payout ratio stability
from the late 1940s through at least the mid-1980s (Choe, 1990, 1991), (ii) the virtual
disappearance of special dividends in recent years, despite their prominence in the
1950s and earlier (DeAngelo et al., 2000), (iii) a reduction in firms propensity to pay
dividends over the last two decades of the 20th century (Fama and French, 2001a),
(iv) the emergence of stock repurchase as a popular payout technique in the 1960s
and early 1970s (Dann, 1981; Masulis, 1980; Vermaelen, 1981), and (v) the massive
increase in repurchase activity in the mid-1980s (Bagwell and Shoven, 1989; Allen
and Michaely, 1995). The interplay of these trends and their possible relation to the
high and increasing concentration of earnings documented here are issues that merit
future investigation.
Finally, our evidence reveals that publicly traded industrial firms exhibit a two-tier
structure based on dollar earnings. The first tier contains a few very high earners,
most of which pay dividends, and these firms dividends collectively dominate theaggregate supply. The second tier contains many firms which, individually and
jointly,